Carbon Taxes Would Drive GHG Emissions Reductions with Minimal Impact on U.S. Economy, Oil and Gas Production

July 20, 2018

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(Columbia University’s Center on Global Energy Policy) A series of four reports released today by Columbia University’s Center on Global Energy Policy and partners assesses the economic, energy, and environmental implications of federal carbon taxes.

The reports analyze various carbon tax legislation scenarios, finding that carbon taxes would increase government revenue by hundreds of billions of dollars a year and drive down U.S. emissions far below current policy, with minimal effects on U.S. oil and gas production and consumption.

The research finds that the annual effects of a carbon tax on U.S. GDP are small, and that young and future generations fare best under most carbon tax scenarios.

The series comes out among renewed political interest in carbon taxes from both Republicans and Democrats, and as lawmakers and presidential candidates look toward post-2020 federal climate policy and creative options for addressing the deficit. The studies, written in an accessible, policy-relevant format, are the first to analyze carbon taxes incorporating 2017 federal tax reform legislation, which changes the landscape for any major future federal tax policy.

“We’ve long known that a carbon tax can be a part of cost-effective national strategy to address climate risks,” said Dr. Noah Kaufman, Director of the Carbon Tax Research Initiative at Columbia’s Center on Global Energy Policy. “This series will help policymakers understand how to best craft carbon tax legislation to meet economic and emissions goals in light of rapid advancements in the energy sector.”

Columbia collaborated with leading independent think tanks and institutions, including The Rhodium Group, the Urban-Brookings Tax Policy Center, and Rice University’s Baker Institute for Public Policy to produce the independent, peer-reviewed reports. In a unique linking of the organizations’ models, the reports state-of-the-art modeling tools to take a deep dive into the implications of an upstream carbon tax that starts at $14, $50, and $73 a ton through a hypothetical first decade of policy implementation (2020s).

AMONG THE REPORTS’ FINDINGS:

Government revenue over the three scenarios increases by about $60 billion, $180 billion, and $250 billion per year. (For context, the US corporate income tax will raise about $380 billion per year in the next decade).
The carbon tax rapidly accelerates the shift away from coal and toward renewable electricity, but the effects on the production and consumption of oil and natural gas are relatively small. The carbon tax drives a 28 to 84 percent reduction in US coal production by 2030 compared to current policy.
Under a $50/ton scenario, emissions fall to 39–46 percent below 2005 levels by 2025, significantly outpacing the U.S. commitment to the Paris Agreement (26 to 28 percent reductions in net GHG emissions by 2025). The analysis shows that the United States is unlikely to meet the U.S. target under current policy.
The most important driver of whether a carbon tax will be progressive or regressive is how the revenue is returned to households.
Macroeconomic impacts of a carbon tax also depend on how the revenue is used. Across all scenarios, annual effects of a carbon tax on US GDP are small, and can be positive or negative, without counting economic benefits of emissions reductions.
The economic impacts of the carbon tax vary by age - young and future generations fare best under most carbon tax designs.
Roughly 80 percent of the emissions reductions caused by the carbon tax are in the power sector, while transportation sector emissions are only 2 percent lower in 2030 in the central tax scenario compared to the current policy scenario.

The scenarios include policies similar to those from recent proposals, including recent prominent Republican-backed proposals from the Climate Leadership Council and the Alliance for Market Solutions, as well as legislation introduced by Democratic senators Whitehouse and Schatz.

Despite the conventional wisdom that carbon taxes are regressive, the analysis finds that the use of revenues determines the effects on taxpayers. For instance, if the revenues are rebated to households equally, the combination of tax policies could be progressive, with lower income households receiving rebates that significantly exceed what they pay in additional taxes.

“Adopting a carbon tax doesn’t have to disproportionately burden lower-income households,” said Joseph Rosenberg of Tax Policy Center. “With careful policy design, legislators could use the substantial revenue raised by a carbon tax to achieve a variety of goals, including a wide range of distributional outcomes.”

Furthermore, use of the revenue determines the impact to GDP and other economic indicators.

“Our results show the effects on national macroeconomic outcomes are small, even in the long run, but the consequences can differ widely across different types of households,” said John Diamond, Director of the Center for Public Finance at Rice University.

With the Trump Administration rolling back many Obama-era climate regulations, the report finds that carbon taxes would significantly reduce U.S. emissions.

“Set at $50 a ton, a carbon tax would allow the United States to meet its Paris commitments by boosting renewable energy while shifting from coal,” said John Larsen, Director at the Rhodium Group. “What may come as a surprise, however, is that such a tax would have a negligible impact on natural gas and oil, even increasing production in the early years of implementation.”

Columbia University’s SIPA Center on Global Energy Policy launched the Carbon Tax Research Initiative earlier this year with the goal of providing data-driven research on carbon taxes to policymakers, business leaders, students and the general public.